Money flows into the city's data centers

Daniel Meltzer of Sabey Data Centers is in charge of leasing the former Verizon switching center at 375 Pearl St. The million-square-foot, 32-story building has undergone a $200 million upgrade aimed at making it a state-of-the-art data center.

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This Week in Crain's: September 15, 2014

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Google's expansion inside its New York City headquarters has sent big-name tenants like Barnes & Noble and Nike looking for new locations. But the real shake-up has been in the data-center industry, where 111 Eighth Ave. is not just Google's East Coast home, but a renowned telecommunications hub.

With one major data-center operator on its way out of the building and other providers wondering about their leases, rival hubs are racing to pick up the refugees. For some New York operators struggling to compete against lower-cost facilities in New Jersey, Google's expansion couldn't come soon enough.

Seattle-based Sabey Data Centers bought the old Verizon switching center at 375 Pearl St. in 2011 partly on the assumption that data-center providers would be relocating from Google's building. The company has since spent upward of $200 million turning the virtually windowless, 32-story tower into a state-of-the-art data-center campus.

Meanwhile, newly formed DataGryd has spent $100 million converting four floors of 60 Hudson St., a famed telecommunications carrier and transatlantic cable hub, into a cutting-edge data-center space. The company has leased out one floor and will begin a marketing push for the rest of the space with an event Sept. 18.

Both companies have to buck the rising tide of competition from New Jersey, which has become especially pronounced in the wake of Superstorm Sandy. But they hope that with a little help from Google and their new systems' reduced power costs, they can expand New York's data-center footprint.

"We're the newest game in town, and all of a sudden 111 Eighth Ave. is no longer on the list," said Daniel Meltzer, the Sabey vice president in charge of leasing 375 Pearl St., now known as Intergate.Manhattan. "That's what's exciting to us: Based on Google's aggressiveness in the market, we've eliminated a major competitor."

Mr. Meltzer added that he is in talks with "a number of medium-to-large" firms at 111 Eighth Ave. that manage servers and networking services for other companies, as well as telecommunications network providers that are "looking for a place to go."

So far, Sabey has leased four floors of the 22 available at Intergate, or—in the terms used by data-center providers, which deal in power, not space—1.3 megawatts of the 1.8 that have been built out. (The building can ultimately provide 40 megawatts of power.) Tenants include the New York Genome Center, the Amsterdam Internet Exchange, "a large enterprise" that cannot be named and data-center providers Windstream and Datagram, one of whose clients is moving from 111 Eighth Ave.

Waiting for right price

Mr. Meltzer acknowledged that Google had moved more slowly to take over its space than Sabey had expected. Competition from New Jersey—which offers cheaper rents and lower energy costs than New York, and a perceived lower risk of flooding—may also be making it harder to fill the building.

The Pearl Street building also has far fewer carriers than the 100 or so inside 60 Hudson St., although, Mr. Meltzer said, the property's 11 are enough, and fiber-optic cable connections can be made to other carriers.

Nonetheless, in May Sabey announced it would market floors 15 through 31 for offices as well as data centers, and would replace the building's limestone skin with glass for tenants that opt for offices. Other plans include constructing retail space at the building's base and a café with views of the Brooklyn Bridge.

In addition to Sabey's other challenges, the company, like DataGryd, is marketing premium wholesale data-center space, which involves multimillion-dollar deals that take a long time to negotiate.

"They have very sophisticated customers who are going to play different value propositions against each other and wait until they get the price they want," said Michael Levy, a senior analyst at 451 Research. "These deals are not flying off the shelf."

Some observers also question how much business will actually be moving out of 111 Eighth Ave.—something that has been hard to gauge, given the secretive nature of the security-conscious industry. Internap, which had 75,000 square feet in the building, has been the only major provider to exit. And Internap is moving to lower-cost New Jersey, to a 100,000-square-foot facility in Secaucus.

Other major 111 Eighth Ave. tenants, most notably Digital Realty Trust, which has more than 100,000 square feet of space, have long-term leases and no plans to move.

"There are small pockets of space where tenants are not being renewed," said David Spiewak, chief executive of DJS Group, who brokers data-center deals. "It's not universal across the building."

He believes Sabey miscalculated the Google effect when it bought the Verizon building and argues that New Jersey's newer infrastructure and roughly 30% lower overall costs make the Garden State increasingly attractive.

"I would say 95% of my clients in New York are relocating out of the city," Mr. Spiewak said.

City connections

But there are still plenty of businesses that need Manhattan's transatlantic cable connections or just want to be within a subway ride of their servers. NYI, a data-center provider for small to medium-size businesses, has picked up seven new clients for its downtown Manhattan facility that didn't want to move to New Jersey, according to Business Development Director Mark Ward.

"Everybody's IT needs are growing," said DataGryd CEO Peter Feldman. "If you look at the data-center industry as a whole, how many millions of square feet they need, and kick it up with any kind of market growth, both our property and Sabey's will be absorbed in the next couple of years."

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